The no-holds-barred fight between Amazon.com (AMZN) and Hachette Book Group over e-book pricing took a turn for the worse recently (for Amazon, that is) after a number of prominent commentators suggested the U.S. Justice Department should sanction the e-commerce giant for alleged violations of antitrust laws.
"The company has achieved a level of dominance that merits the application of a very old label: monopoly," wrote Franklin Foer of the New Republic earlier this month. And just this past week, Nobel Prize-winning economist Paul Krugman claimed in The New York Times that the online retailer "has too much power, and uses that power in ways that hurt America."
But to anyone familiar with antitrust legislation -- more specifically, federal appeals courts' interpretation of the Sherman Antitrust Act -- it's clear that claims like these are nothing more than hyperbole. While Amazon is certainly a large and growing online retailer, even a liberal interpretation of its share of the domestic e-commerce market puts the figure at less than 50%, which is well below the 70% threshold courts typically require as proof of monopoly power.
The gap between hyperbole and reality widens when you consider the e-commerce market's insignificance in the context of overall retail sales. In 2013, for instance, domestic e-commerce sales added up to $263 billion, which is a fraction of the $4.5 trillion in total retail sales processed in the United States over the same period.
And even if a court found Amazon to possess monopoly power -- as one could somewhat realistically claim it does in the e-book market -- that's still only half the battle, as it must also be proved that said power is being exercised to the detriment of consumers. According to the Justice Department's antitrust guidance, "Prohibiting the mere possession of monopoly power is inconsistent with harnessing the competitive process to achieve economic growth."
To prove Amazon is illegally exercising this hypothetical power, in turn, one would have to demonstrate that it is raising prices or curtailing supply by, among other measures, keeping competitors out of the market through predatory pricing or other prohibited means. Implicit in this is the assumption that Amazon earns monopoly profits -- that is, the economic profits that accompany inflated prices. But as many investors know, Amazon has never reported meaningful earnings. In 2013, it generated a mere $274 million in net income from $74.5 billion in sales. That equates to a profit margin of only 0.37%.
Its willingness to forgo earnings even led former Slate columnist Matthew Yglesias to characterize Amazon as a "charitable institution being run by elements of the investment community for the benefit of consumers." Amazon founder and CEO Jeff Bezos took issue with that point by arguing that his company isn't a charity, but instead a business whose strategy is to make customers as happy as possible. Suffice it to say, among monopolies, that is unbecoming behavior.
As a final point, it's important to appreciate that Amazon isn't just a retailer; it's also a marketplace for third parties to sell their wares and, in many cases, to compete against Amazon itself. A recent survey of companies that sell products online found that 84% of them use Amazon's platform to do so. While the company doesn't release figures about the size of this channel, one estimate pegged its total third-party sales last year at $73.5 billion. If accurate, this would mean Amazon facilities more third-party business than it records on its own behalf.
Thus, as a matter of law and common sense, there's little evidence to back the claim that Amazon has exercised or is exercising monopoly power in a way that, as Krugman and other commentators would lead you to believe, hurts America. Does this mean the online giant won't ultimately accumulate enough market share to do so? No. But it does mean that we have years, if not decades, before that's a legitimate concern for the Internet retailer.